January 15, 2014

Refinancing a Home - Revocable Trust

When a home is titled in the name of a revocable trust (or living trust) and the trustee wishes to refinance the home, a bank will often require the trustee to transfer the home out of the trust and into the trustee's individual name. For instance, if title is held by "John Doe, Trustee of the Doe 2014 Rev. Trust dated 1/15/14," a bank will typically ask that Mr. Doe transfer title to "John Doe."

One reason why the bank is leery of refinancing when title is held by the trustee of a revocable trust is because it is unclear who is the equitable owner of the property. When a married couple or single person applies for a refinance, the bank will first check to see how title is held. Naturally, a bank will not extend a home loan if the borrower does not own the home. Ah, those crazy banks. Upon inspection of the deed, ownership of the home should be apparent. I say apparent because in the case of a home owned by a revocable trust, it is unclear who is the beneficial owner of title. Legal title is readily clear because the legal title holder will be the name of the trustee. In particular, if correctly titled, the trustee's name, the name of the trust and the date the trust was formed should be listed on the deed. However, no deed will state the name of the equitable title owners, i.e. the beneficiaries of the trust.

Ascertaining the beneficial title owner(s) is particularly important because they have equitable powers that can be enforced against the trustee. For example, the beneficiaries can have the trustee removed, surcharged or suspended for breach of fiduciary duty. Therein lies the problem with refinancing when title is held by the trustee, these unknown beneficiaries can cause legal headaches for the trustee and the bank is unaware of who they may be.

In light of this, some banks insist that title be transferred from the trustee(s) back to the individual(s) in order for the refinancing process to be completed. Still, some banks are okay with the home remaining titled in the name of trustee provided the trustee completes a detailed questionnaire which identifies the appropriate parties, i.e. the trustee and beneficiaries, and the trustee's powers.

For people who must transfer the home out of the trust, it is especially crucial that they transfer the home back into the trust once refinancing has completed. Otherwise, probate may be needed if an owner passes away and title is held in their individual name instead of the trustee's name. This is a rather ironic consequence because almost invariably a person writes a revocable trust to avoid probate.